Canadian dollar holds near 11-week high on ECB, Fed hopes

By Claire Sibonney

4 Min Read

TORONTO (Reuters) - The Canadian dollar hovered near an 11-week high against the U.S. dollar on Monday as expectations rose that the European Central Bank and the U.S. Federal Reserve will provide stimulus to support their struggling economies.

Positive sentiment from last week spilled over into Monday's trade after the leaders of France and Germany said they are "determined to do everything to protect the euro zone" and its single currency. That echoed ECB President Mario Draghi's pledge on Thursday to do whatever is necessary to protect the euro zone from collapse.

The rhetoric raised expectations that the ECB could take bold measures to lower soaring Italian and Spanish borrowing costs and supported riskier assets. Italy's benchmark 10-year borrowing costs eased below 6 percent and the country managed to sell bonds at the top of its planned issue range of up to 5.5 billion euros on Monday.

However, some investors doubt that ECB policymakers will deliver in line with market expectations when they meet on Thursday, with September shaping up to be a "make-or-break" month in the search for a resolution to the three-year-old debt crisis.

"I think we go into the ECB meeting with the market having quite elevated expectations that the ECB may do something," said Adam Cole, global head of FX strategy at RBC Capital Markets in London.

"On balance, I think if anything, there's probably scope for disappointment as the ECB rarely puts together policy in a hasty fashion at the best of times, and now, in particular there seems to be little incentive for them to do that."

At 8:05 a.m. EDT (1205 GMT), the Canadian dollar stood at C$1.0034 versus the greenback, or 99.66 U.S. cents, slightly firmer than Friday's North American session close at C$1.0044, or 99.56 U.S. cents.

Investors will keep an eye on any developments from U.S. Treasury Secretary Timothy Geithner's meeting with German Finance Minister Wolfgang Schaeuble and Draghi on Monday. The U.S. Treasury said they will discuss the U.S., European and global economies.

The U.S. Federal Reserve also holds a policy meeting on Tuesday and Wednesday. Speculation is growing that the Fed will do more to bolster recovery, after data showed U.S. second-quarter gross domestic product expanded at a 1.5 percent annual rate, the weakest pace of growth since the third quarter of 2011.

U.S. non-farm payrolls data on Friday is expected to provide markets with further direction.

"Until we get to some of these big event risks on Wednesday, Thursday, Friday, the momentum still seems to be downward for dollar/Canada," added Cole.

"(I) wouldn't be surprised if we did continue to tick down ... possibly through parity in the early part of the week."

He cautioned, however, that any disappointing policy announcements from the two major central banks or a soft U.S. jobs number would threaten the Canadian dollar's recent rally.

Canadian bond prices edged slightly higher across the curve with the two-year bond up 1 Canadian cent to yield 1.107 percent, and the benchmark 10-year bond up 3 Canadian cents to yield 1.744 percent.